Tag Archives: investment advice

10-Year Investing Forecast: Takeaways for Advisors & Clients

investmentsMy Comments: When you look back ten years from now and wonder if this article came anywhere close to reality, you must remember that people are much happier with you if you estimate low returns and reality turns out to be high, rather than the other way around.

The charts are hard to understand, at least they are for me. The short takeaway for us is that what happened in 2008-09 was not within the 5% chance of happening. A meltdown like we had only happens once every 40 – 60 years. Another takeaway is the expected annual return for stocks from the people referenced. The high number is less than 6% annually. If they are right, then it behooves you to find advisors who give you at least a chance to make money in the inevitable down markets. Because the upmarkets are going to be relatively pathetic.

by Allan S. Roth / AUG 4, 2014

We all want to know how stocks and bonds will perform next year and beyond. Unfortunately, forecasts typically give very tight ranges of returns — and often merely predict the past. That may partly explain why investors continue the pattern of buying high and selling low.

The Vanguard Capital Markets Model, which forecasts both returns and risks over the next 10 years, takes a more useful approach. Your clients might prefer to have more precise forecasts, but uncertainty is a reality.

This forecast may help you both design a better portfolio and explain its rationale to your clients. I spoke with Roger Aliaga-Diaz, a principal and senior economist in Vanguard’s Investment Strategy Group, about the model and its implications for investors.

The Vanguard Capital Markets Model’s estimated returns are based on 10,000 simulations. This Monte Carlo analysis runs not only variations of returns but also ranges of risk (standard deviation) and correlations among asset classes.

The “Range of Returns” and “Asset Class Correlations” tables below shows the forecast returns and ranges and the historical correlations.
2014-08-13 Portfolio_roth_8_14
Portfolio_roth_8_14_2

EQUITY EXPECTATIONS

The first takeaway: Across the board, equities are expected to far outpace inflation, which is estimated at 2% annually. As the midpoint in the range of expectations, U.S. stocks are estimated to return 7.7% annually, while international stocks will yield 8.5%.

International stocks were seen as likely to outperform U.S. stocks for a few reasons, says Aliaga-Diaz: International valuations are more attractive and investors are compensated for taking on more risk. The annual standard deviation for international stocks was 20.9%, he points out, compared with 17.6% for U.S. stocks.

Within the bracket of outcomes that Vanguard believes have a 90% probability of occurring, U.S. stocks are shown as returning between a loss of 2% annually and a gain of a whopping 17.7%.

International stocks, by contrast, are seen as returning anywhere from a loss of 3.3% to a 21.1% annualized gain. To put this in perspective: In 10 years, a $1 million investment in U.S. stocks could be worth anywhere from $820,000 to $5.1 million. And the same investment in international stocks could be worth anywhere from $710,000 to $6.8 million.

Not only is that range of returns incredibly large — and only somewhat helpful from a planning perspective — but Vanguard says there is a 10% probability that the actual return will land outside of these ranges. And the downside risk is even worse after you factor in inflation.

The bottom line, of course, is that equity investing is risky — any forecast asserting otherwise would be claiming to have precise (and, needless to say, impossible) foreknowledge of economies, geopolitical events and investor sentiment. Nonetheless, equities offer the best expectation for high future returns.

Clients should also understand the impact of expenses and emotions on these returns. Aliaga-Diaz notes that the projections are geometric asset class returns and don’t include costs, and that even the lowest-cost index funds have some fees. And clients need to stay the course. Even with the least-costly index funds, investors’ returns underperform fund returns — an indication that investors time the market poorly.

FIXED-INCOME INVESTMENTS
Bonds, of course, have lower expected returns with less risk. Vanguard predicts the aggregate bond index of investment-grade bonds will return 2.5% annually — just half a percentage point more than inflation.

The range is much tighter than for stocks, with the 90% confidence interval showing returns ranging between 1.2% and 3.9% annually. Translated again, this suggests that a $1 million investment would be worth anywhere between $1.13 million and $1.47 million after a decade.

Note that these returns are far below those of the last decade, when declining rates were good for bonds. The narrow range of returns for bonds illustrates the role of high-quality bonds; they are more a store of money than a growth vehicle. Hedged international bonds offer similar expected returns and volatility.

Both of these bond classes have little credit risk; increasing credit risk increases correlation with stocks. For example, according to Morningstar, the average bond mutual fund — which is more likely to include bonds of lower credit quality — lost 8% in 2008 while Vanguard’s Total Bond ETF (BND), which follows the Barclays Capital Aggregate Bond Index, gained about 5.1%.

One more note on the inflation forecast: While 2% doesn’t sound unusual, extrapolating the downside shows about a 15% probability of sustained deflation over the next decade. Should that occur, the resulting scenario would be bad for stocks and great for longer-term U.S. government bonds.

CONSTRUCTING A PORTFOLIO
What matters most for clients, of course, are real (after inflation) returns. But to model the impact of inflation, we can’t just deduct two percentage points — because inflation impacts the returns of the asset classes.

The Vanguard model — run for a combination of U.S. and domestic equities, with various maturities of Treasuries and corporate fixed-income securities — looks at various weightings, from conservative to aggressive. The “Portfolio Implications: Real Returns” chart above shows the results.

Because high-quality bonds and equities have low correlation to each other, you’ll note the combined portfolios have less downside than the simple average of stocks and bonds.

The good news is that even a conservative portfolio of only 20% equities is forecast to outpace inflation by 1.7 percentage points annually. And it can still deliver a handsome return if results are high in the range of possible outcomes.

The takeaway here is that clients who have met their goals and have little need to take risk — even those who say they have a high risk tolerance — should consider a high concentration of high-quality bonds. (Think back to March 2009 and ask yourself if clients’ appetite for risk was in fact constant.)

A moderate portfolio of 60% equities is projected to outpace inflation by 4.2 percentage points annually. An aggressive portfolio of 80% stocks does deliver an expected return of 5.4% annually, while the downside is only an extra annualized 0.7 percentage point loss relative to the moderate portfolio.

While this might argue for taking on more risk, few aggressive investors want to stay the course when markets melt down. By my calculations, that portfolio declined by about 31% in 2008; that’s more than two standard deviations away from the mean and should happen only once every 40 years.

HOW MUCH RISK?

Just looking at the numbers, one could conclude that the 80% equity portfolio isn’t that much riskier than the 20% equity portfolio. In real terms, the outcome at the bottom fifth percentile for the 80% equity portfolio loses about 31% of spending power, while the fifth-percentile result for the 20% equity portfolio loses about 22%.

But don’t forget that a fifth-percentile outcome doesn’t measure the so-called black swan event that many said happened in 2008.

What this means for your clients is certainly open for interpretation. This is perhaps the most comprehensive economic model I have reviewed, but even so, it is important to remember that this is only one model.

Vanguard predicts a most likely case of a 5.7% real annual returns for stocks, but other experts are more cautious. In his new book, Rational Expectations, William J. Bernstein predicts a 2% real return for large-cap stocks and 3% for small-cap stocks over the next decade. Rob Arnott, chairman of Research Affiliates, forecasts a 3% real return over the next decade.

My opinion is that the future is even more uncertain than the ranges shown in the Vanguard model — especially on the downside. And as I see it, the world is a less predictable place than ever before.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for CBS MoneyWatch.com and has taught investing at three universities. Follow him on Twitter at @dull_investing.

The Typical Household, Now Worth a Third Less

My Comments: You have read my posts before where I talk about income inequality  (the HAVES vs. the HAVE NOTS) and how if left unchecked, could result in social chaos in this country. Probably not in my lifetime, but definitely affecting the lives of my grandchildren. It’s an issue that demands discussion among ourselves and those who profess to be politically motivated.

Economic inequality in the United States has been receiving a lot of attention. But it’s not merely an issue of the rich getting richer. The typical American household has been getting poorer, too.

The inflation-adjusted net worth for the typical household in 2003 was $87,992. Ten years later, in 2013, it was $56,335. This is a 36 percent decline in very few years, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

The Russell Sage study also examined net worth at the 95th percentile. (For households at that level, 94 percent of the population had less wealth and 4 percent had more.) It found that for this well-do-do slice of the population, household net worth increased 14 percent over the same 10 years. Other research, by economists like Edward Wolff at New York University, has shown even greater gains in wealth for the richest 1 percent of households.

For households at the median level of net worth, much of the damage has occurred since the start of the last recession in 2007. Until then, net worth had been rising for the typical household, although at a slower pace than for households in higher wealth brackets. But much of the gain for many typical households came from the rising value of their homes. Exclude that housing wealth and the picture is worse: Median net worth began to decline even earlier.

“The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

The reasons for these declines are complex and controversial, but one point seems clear: When only a few people are winning and more than half the population is losing, surely something is amiss

Wealth Managers Enlist Savvy Spy Software to Map Portfolios

profit-loss-riskMy Comments: I’ve been playing this financial game now for almost 40 years. And like so much in today’s world, it’s very different today than it was then. Technology forces us to embrace new thoughts and ways to deal with so much in life.

When it comes to managing your money, my role as an investment advisor and financial planner causes me to try and stay at least near the front of the line, otherwise I’ll get left behind.

Much better returns on investment (ROI) can be had today, hypothetically, than we could have hoped for 30 years ago. Do you remember when interest rates less than 10% were thought to be ridiculous? Now we are living with interest rates near zero and have been for some time. So how is it possible to predict that a 10% ROI is reasonable today?

The following article talks about people of wealth that no one around here fully understands. And so for the rest of us, it’s kind of meaningless. Except when they talk about technology and how far its come so that mere mortals like us can benefit. Having access to these technologies can make a huge difference in your life.

Posted by Steven Maimes, Contributor – on August 5th, 2014
NYT article by Quentin Hardy

Some of the engineers who used to help the Central Intelligence Agency solve problems have moved on to another challenge: determining the value of every conceivable investment in the world.

Five years ago, they started a company called Addepar, with the aim of providing clear and reliable information about the increasingly complex assets inside pensions, investment funds and family fortunes. In much the way spies diagram a communications network, Addepar filters and weighs the relationships among billions of dollars of holdings to figure out whether a portfolio is about to crash.

Professional wealth managers are going to be seeing a lot more of big data. Last spring, Addepar raised a substantial sum to take this mainstream, and although it is not the only one bringing big data to a portfolio statement, its cast of characters sets it apart.

“One of the most foundational questions in finance is ‘What do I own, and what is all of this worth?’ ” said Eric Poirier, the chief executive of Addepar. “ ‘What is my risk?’ turns out to be an almost intractable problem.”

Although the list of wealth managers who use Addepar is confidential, Mr. Poirier says it has already grown from people like Joe Lonsdale, its tech-billionaire founder, and Iconiq Capital, which manages some of the Facebook co-founder Mark Zuckerberg’s money, to include family offices, banks and investment managers at pension funds.

“In this state, some people are just getting wealthier,” said Joseph J. Piazza, chairman and chief executive of Robertson Stephens L.L.C., a San Francisco investment adviser that manages about $500 million using software from Addepar. Ten years ago, he said, “it might be a young entrepreneur with $50 million. Now it could be 10 times that, and they are thoughtful, bigger risk-takers.”

Investing used to be a relatively simple world of stocks, bonds and cash, with perhaps some real estate. But deregulation, globalization and computers have meant more choices. For a wealthy person, this could mean derivatives, private equity, venture capital, overseas markets and a host of other choices, like collectibles and Bitcoin.

And for all the computers on Wall Street’s trading floors, a lot of money management is surprisingly old-fashioned. Venture capitalists may invest in cutting-edge technology, but they sometimes still send out quarterly reports on paper. Financial custodians, which hold securities for people, often have custom-built computer systems. That makes it hard to compare a trade at one with a trade at another.

“The market is much more complicated than it used to be,” said David G. Tittsworth, president and chief executive of the Investment Adviser Association, a trade group of 550 registered firms. “The rich have bigger appetites for futures, commodities, alternative investments. There’s a lot of demand for helping them keep track of what their holdings actually are.”

Mr. Poirier, 32, a New Hampshire native who started a coding business at 14 before heading to Columbia University, worked on analyzing fixed-income products at Lehman Brothers from 2003 to 2006, before that Wall Street firm collapsed from mismanagement of its own risk. “Trying to figure out a yield, I’d work with a dozen different computer systems, with different interactions that people didn’t understand well,” he said.

He then took a job with Palantir Technologies, a company founded to enable military and intelligence agencies to make sense of disparate and incomplete data. He went on to build out Palantir’s commercial business, managing risk for things like JPMorgan Chase’s portfolio of subprime mortgages.

There were plenty of parallels between the two worlds, but instead of agencies, spies and eavesdropping satellites, finance has markets, investment advisers and portfolios. Both worlds are full of custom software, making each analysis of a data set unique. It is hard to get a single picture of anything like the truth.

Even a simple question like “How many shares of Apple do I own?” can be complicated, if some shares are held outright, some are inside a venture fund where the wealthy person is an investor and some are locked up in a company that Apple acquired.

Finance “was the same curve I encountered in the intelligence community,” Mr. Poirier said. “How do you make sense of diverse information from diverse sources, when the answer depends on who is asking the question?”

The parallel was also evident to Mr. Lonsdale, a Palantir co-founder. From an earlier stint at PayPal, he had millions in cash and on paper is a billionaire from his Palantir holdings. He also knew lots of other young people in tech who could not make sense of what was happening to their money. “Wealth management is designed for the 1950s, not this century,” he said.

Mr. Lonsdale left Palantir in 2009, starting Addepar with Jason Mirra, another Palantir employee, in 2009. “It didn’t make sense for Palantir to hire 20 or 30 people to work in an area like this,” Mr. Lonsdale said. Mr. Mirra is Addepar’s chief technical officer. Mr. Poirier joined in early 2013 and became chief executive later that year.

Besides Mr. Lonsdale, early investors in Addepar included Peter Thiel, a founder of both PayPal and Palantir. More money came from Palantir’s connections to hedge fund investors. Addepar’s $50 million funding round last May was led by David O. Sacks — another PayPal veteran, who sold a company called Yammer to Microsoft for $1.2 billion in 2012 — and Valor Equity Partners, a Chicago firm that has also invested in PayPal, SpaceX and Tesla Motors, among other companies.

Despite the pedigree, Mr. Lonsdale says Addepar, which has 109 employees, is not meant just as a tool for rich tech executives or family money. They are, he said, “just the early adopters.”
Karen White, Addepar’s president and chief operating officer, says a typical customer has investments at five to 15 banks, stockbrokers or other investment custodians.

Addepar charges based on how much data it is reviewing. Ms. White said Addepar’s service typically started at $50,000, but can go well over $1 million, depending on the money and investment variables involved.

And in much the way Palantir seeks to find common espionage themes, like social connections and bomb-making techniques, among its data sources, Mr. Lonsdale has sought to reduce financial information to a dozen discrete parts, like price changes and what percentage of something a person holds.

As a computer system learns the behavior of a certain asset, it begins to build a database of probable relationships, like what a bond market crisis might mean for European equities. “A lot of computer science, machine learning, can be applied to that,” Mr. Lonsdale said. “There are lessons from Palantir about how to do this.”

A number of other firms are also trying to map what everything in a diverse portfolio is worth. One of the largest, Advent Software, in 2011 paid $73 million for Black Diamond, a company that, like Addepar, uses cloud technology to increase its computing power and more easily draw from several databases at once.

“We’ve been chipping at the problem for 30 years,” said Peter Hess, Advent’s president and chief executive. “There is a lot more complexity now, and the modernization of expectations about how things should work is led by the new tech money. But because of Apple and Google, even my parents have expectations about how easy tech ought to be.”

New Longevity Annuity Rules: 5 Things to Know

retirement-exit-2My Comments: Earlier this week I introduced the idea of a QLAC. If you didn’t see it, click on the link and check it out.

Some of you are going to want to use this contract as soon as it becomes available this fall. Others are going to think about how your investment mix will change today so that money in a QLAC is maximized by the time you are 85 years old.

Another reason for consideration is that while annuities are a contentious topic, they have their advantages. Some advisors swear by them; others say the fees will kill you. In my opinion, they have their uses when clients are fearful of how life might play out and the insurance element built into annuities provides a peace of mind dividend that can be found in no other product or investment.

What these new rules do not appear to include are 403(b) accounts, which are very common here in Gainesville. That’s because a 403(b) is a generic equivalent of a 401(k), but for the non-profit world only, such as the University of Florida or Santa Fe College. The answer may be to transfer money out of your 403(b) into an IRA at retirement, with up to 25% going into a QLAC.

By Nick Thornton July 15, 2014

Retirement account holders can now put 25% of their money in QLACs.

In recognition of the reality that many Americans will live well into their 80s, the Department of Treasury recently issued final rules making Deferred Income Annuities more accessible to those with good genes and perhaps inadequate savings.

The rules could be a game changer for how boomers, and their advisors, allocate 401(k) and IRA assets going forward.

Here is a breakdown of the core provisions to the new regulations governing DIAs.

1. Defined contribution participants and IRA owners are now allowed to invest up to 25% of their account balances, or up to $125,000, in qualifying longevity annuity contracts, or QLACs. That money will not be subject to the annual minimum distribution requirements governing 401(k) and individual retirement accounts that begin at age 70 1/2.

2. Longevity annuities will distribute cash at a set age, typically by 80 or 85. If the owner of the annuity happens to die before they begin to receive benefits from the annuities, all is not lost. The principal and premiums paid on the contract will be returned to the retirement account, where the money is subject to the same laws governing the inheritance of retirement accounts.

3. In the event that investors, and or their advisors, inadvertently distribute more than the 25 percent limit to a deferred annuity, the IRS will allow the mistake to be corrected without disqualifying the annuity contract.

4. Lump-sum investments can be made into QLACs, or, salary deferrals can be incrementally made into the contracts, much as they are with a 401(k) plan.

5. Ultimately, the cash value of QLACs is subtracted from the rest of a retiree’s assets in a 401(k) or IRA when determining the required minimum distributions when they take effect.

Sensible Expectations for Inflation

retirement_roadMy Comments: When I talk with prospective clients and those already clients, I talk about existential risk. These are risks that may or may not happen, depending on any number of variables. One of them is inflation since it reduces the purchasing power of your dollars over time.

Another existential risk is the financial burden imposed on a family whenever someone needs long term care. The odds are high it will happen for 60% to 75% of us. However, if you simply die before the need for long term care happens, then the risk disappears.

Inflation risk is far less existential, if you expect to live a long and happy life, chances are good it will be there, with the only question being how much inflation. Having solutions in place that mitigate the risk makes sense.

Managing expectations is also an important part of financial planning. Growing your money over time at a rate that exceeds the rate of inflation goes a long way to helping you maintain your standard of living going forward.

posted by Jeffrey Dow Jones July 24,2014 in Cognitive Concord

One of the things I’ve been watching closely over the last few months is inflation. Not for the reasons you might be thinking — I’m not one of these inflation truthers banging that tired old drum that inflation is higher than being reported. I don’t think there’s a big conspiracy out there about the CPI. All things considered, and as complicated as it is to calculate, it’s actually a really good data point.

One of the early themes of this newsletter, way back in 2009, was that inflation wasn’t something to worry about. Longtime readers may remember The Inflation Chupacabra with fondness. The basic premise was: I’ll believe it when somebody brings me solid evidence. Five years later, I’m still waiting.

It’s possible – possible — that may be changing.

What I’m really watching right now is wage inflation. Because without a significant and sustained pickup in wages, you can’t get a significant and sustained pickup in prices. The one supports the other. For some reason, there’s this myth out there in certain circles where, in this decade of stagnant income, systemic inflation can run at 5 or 10% per year. It can’t. Some goods can increase in price at a dramatic rate. But not systemic prices, not unless the wages supporting those prices also rise.

Wage inflation is unquestionably picking up a little bit, but it’s not significant enough to set the sirens blaring. We still have a long way to go before reaching levels of concern. I posted this chart from Deutsche Bank’s Torsten Slok a few weeks ago:
CONTINUE-READING

3 Market Warning Signs Predict 20% Stock Tumble

My Comments: No need for any commentary from me. Just draw your own conclusions, and hope that if the author is right, you’ve talked with me about how to make money when everyone around you is losing theirs.

On the other hand, essentially this same argument was made last April and yet the crash has not happened. Yet.  Another example of the boogyman creating uncertainty. All you can do is be prepared, which I hope you are.

MarketWatch commentary by Mark Hulbert / August 3, 2014

Over the past 45 years, the stock market has lost more than 20% each time three warning signs flashed simultaneously.

After a selloff this past week dragged the Dow Jones Industrial Average into negative territory for the year, it’s worth noting that all three are flashing today.

The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors.

They have gone off in unison six times since 1970, according to Hayes Martin, president of Market Extremes, an investment consulting firm in New York whose research focus is major market turning points.

Bear in the air

The S&P 500’s average subsequent decline on those earlier occasions was 38%, with the smallest drop at 22%. A bear market is considered a selloff of at least 20%, with bull markets defined as rallies of at least 20%.

In fact, no bear market has occurred without these three signs flashing at the same time. Once they do, the average length of time to the beginning of a decline is about one month, according to Martin.

The first two of these three market indicators — an overabundance of bulls and overvaluation of stocks — have been present for several months. Back in December, for example, the percentage of advisers who described themselves as bullish rose above 60%, a level Investors Intelligence, an investment service, considers “danger territory.” Its latest reading, as of Wednesday, was 56%.

Also beginning late last year, the price/earnings ratio for the Russell 2000 index of smaller-cap stocks, after excluding negative earnings, rose to its highest level since the benchmark was created in 1984 — higher even than at the October 2007 bull-market high or the March 2000 top of the Internet bubble.

Three strikes and you’re out

The third of Martin’s trio of bearish omens emerged just recently, which is why in late July he advised clients to sell stocks and hold cash. That’s when the fraction of stocks participating in the bull market, which already had been slipping, declined markedly.

One measure of this waning participation is the percentage of stocks trading above an average of their prices over the previous four weeks. Among stocks listed on the New York Stock Exchange, this proportion fell from 82% at the beginning of July to just 50% on the day the S&P 500 hit its all-time high.

It was one of “the sharpest breakdowns in market breadth that I’ve ever seen in so short a period of time,” Martin says.

Another sign of diverging market sectors: When the S&P 500 hit its closing high on July 24, it was ahead 1.4% for the month, in contrast to a 3.1% decline for the Russell 2000.

Expect up to a 20% S&P 500 decline

How big of a decline is likely? Martin’s best guess is a loss of between 13% and 20% for the S&P 500, less than the 38% average decline following past occasions when his triad of unfavorable indicators was present. The reason? He expects the Federal Reserve to quickly “step in to provide extreme liquidity to blunt the decline.”

To be sure, Martin focuses on a small sample, which makes it difficult to draw robust statistical conclusions. But David Aronson, a former finance professor at Baruch College in New York who now runs a website that makes complex statistical tests available to investors, says that this limitation is unavoidable when focusing on past market tops, since “by definition it will involve a small sample.”

He says that he has closely analyzed Martin’s research and takes his forecast of a market drop “very seriously.”

Martin says that expanding his sample isn’t possible because most of his current indicators didn’t exist before the 1970s and “the comparative math gets very unreliable.” But he says he does use several statistical techniques for dealing with small samples that increase his confidence in the conclusions that his research draws.

Russell 2000 could take 30% hit

He says stocks with smaller market capitalizations will be the hardest hit in the decline he is anticipating, in part because they currently are so overvalued. He forecasts that the Russell 2000 will fall by as much as 30%.

Also among the hardest-hit stocks during a decline will be those with the highest “betas” — that is, those with the most pronounced historical tendencies to rise or fall by more than the overall market. Martin singles out semiconductors in particular — and technology stocks generally — as high-beta sectors.

He predicts that blue-chip stocks, particularly those that pay a large dividend, will lose the least in any decline. One exchange-traded fund that invests in such stocks is iShares Select Dividend, which charges annual expenses of 0.40%, or $40 per $10,000 invested.

The average dividend yield of the stocks the fund owns is 3%; that yield is calculated by dividing a company’s annual dividend by its stock price. Though the fund’s yield is higher than the S&P 500’s 2% yield, it nevertheless pursues a defensive strategy. It invests in the highest-dividend-paying blue-chip stocks only after excluding firms whose five-year dividend growth rate is negative, those whose dividends as a percentage of earnings per share exceed 60% and those whose average daily trading volume is less than 200,000 shares.

The consumer-staples sector has also held up relatively well during past declines. The Consumer Staples Select Sector SPDR ETF currently has a dividend yield of 2.5% and an annual expense ratio of 0.16%.

If the broad market’s loss is in the 13%-to-20% range that Martin anticipates, and you have a large amount of unrealized capital gains in your taxable portfolio, you could lose in taxes what you gain by selling to sidestep the decline. But the larger losses he anticipates for smaller-cap stocks could be big enough to justify selling and paying the taxes on your gains.

Increased Consumer Spending Driving Strong Economic Growth In USA

USA EconomyMy Comments: On Thursday, July 30 the market dropped 300 points. The blogosphere and media were all a chatter about “was this the start of the correction?”. Who knows ?!?

It illustrates why those of us who profess to be financial advisors are more in the dark than you are. Here we are talking about a looming market correction, one that will happen, and the longer it takes to start the more violent it is likely to be. And here I am this morning, coming to you with good news about the economy. Seems totally weird, doesn’t it?

What has to be remembered is that the markets are always forward looking. I want to invest my money before it goes up, if at all possible. If I think it’s going to crater, I’m taking my money out. At least that’s the plan, unless you use some of the approaches favored by us at Florida Wealth Advisors, LLC.

What this headline tells me is that when the correction happens, it will be relatively short term and though perhaps dramatic, it will not be systemic.

Jul. 31, 2014 / APAC Investment News

Summary
• The Bureau of Economic Analysis is reporting 4 percent growth in the second quarter, a strong rebound from the first quarter.
• Consumer spending in both durable and non-durable goods is up. Both exports and imports also rose, along with most other indicators.
• This economic growth should provide some upward pressure for markets, at least in the short term.

The United States has struggled to fully recover from the 2008 Financial Crisis. While stock markets have rebounded, unemployment has remained high and economic growth has been tepid. New data points to the U.S. economy growing a solid 4 percent in the second quarter, however, propelled by an increase in consumer spending. This should help stabilize markets and perhaps even push them higher.

With consumer spending accounting for roughly 2/3rds of America’s economy, any increase in consumer spending should come as a relief for those concerned of yet another slowdown. Still, stock markets hovered in place following the release of the data on Wednesday, likely over concerns about the Fed’s next move with interest rates and the continued wind down of its asset buying program.

Consumer Spending On The Rise
According to the Bureau of Economic Analysis consumer spending increased a solid 2.5 percent in the second quarter, up from 1.2 percent in the first quarter. Durable goods, which includes automobiles, appliances, and other similar goods, increased by an astounding 14 percent, compared with an increase of just 3.2 percent in the first quarter. Non-durable goods, which includes food and clothing, increased by 2.5 percent. The BEA presents its numbers in seasonally adjusted annual rates.

Automobiles have been performing particularly well as of late, even while General Motors is still feeling the fallout from a major scandal and many automakers are suffering a rash of recalls. There were some fears of a major slowdown following the economic contraction in the first quarter, but for now it appears that the feared slow down hasn’t materialized.

Ford did suffer a decline in sales in June, falling some 5.8 percent YOY. While this may not seem like good news, the drop was not as bad as expected. Meanwhile, General Motors sales rose 1 percent even in spite of the bad publicity from the ignition scandal, and Chrysler posted a solid 9.2 gain.

Growth Being Driven By Other Factors
Besides consumer spending, other areas of the economy have also performed well. Exports rose by 9.5 percent, following a sharp decline of 9.2 percent in the first quarter. This suggests that the global economy may also be growing. Imports also rose 11.7 percent, compared with an increase of only 2.2 percent in the first quarter.

Investment in equipment rose 7 percent, while investments in non-residential structures rose by 5.3 percent.

Interestingly, federal government consumption actually decreased by .8 percent, suggesting that the rise in spending is being driven by private businesses and consumers. This should come as a welcome sign given the government’s high debt burden. Simply put, the American government likely couldn’t afford to drive up consumption even if it wanted to.

Strong Economic Growth Should Re-enforce Markets
For now, strong economic growth should keep markets buoyant even with many factors exerting downward pressures. Sanctions on Russia, tensions in the South China Seas, political infighting in Congress, the possible fallout of the Fed curtailment of its asset buying program, and numerous other factors have created jitters. Strong economic growth can counteract these downward pressures, at the very least.

Meanwhile, as stock indexes have surged to all time highs, there have been some concerns that a bubble may be building. While stock markets have been performing well, the economy in general seemed to be suffering from sluggish growth, suggesting that something besides actual economic performance has been driving stock prices upwards. Now, however, economic growth finally appears to be in line with the rising stock market indexes.

So long as the economy continues to grow, markets should remain stable. Of course, the economy itself could quickly swing back into contraction. Government debt levels remain high, profits can evaporate over night, and consumer sentiments can change quickly.

Further, as the economy continues to grow, the Fed will almost certainly continue to cut back its stimulus measures, and eventually even raise interest rates. This, in turn, could slow economic growth. Meanwhile, stagnant wages, continued high unemployment, high debt levels, and other factors could eventually pose a threat.